Treasury Inflation Linked Auction Tail Dims Sale for Dealers

A higher-than-forecast yield dimmed the Treasury’s $7 billion inflation-linked bond auction for the Wall Street dealers that bid at U.S. government debt sales even with investor demand greater than average.

The auction’s tail, or amount of yield in excess of where the security was trading before yesterday’s sale, was more than 2 basis points, according to Princeton, New Jersey-based Stone & McCarthy Research Associates. The 22 primary dealers that bid at Treasury auctions may be forced to resell the securities at lower prices than at what they purchased the debt for in what’s known as when-issued trading before the sale.

“No one bid very aggressively for the securities,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “The tail was pretty big.”

A day prior to the auction, Federal Reserve Chair Janet Yellen had brushed aside concern that inflation is quickening after consumer prices rose more than forecast in May. Yellen told reporters after the end of the Fed’s two-day policy meeting that consumer price data had “been a bit on the high side” while adding that the recent “data that we’re seeing is noisy.”

“The question was really after what Yellen said about inflation being ‘noise’ -- that kind of made you think about inflation,” Roth said. “I guess more people thought that Yellen was right.”

Demand Measures

The Treasury Inflation Protected Securities were sold at a so-called high yield of 1.116 percent, versus the average forecast of 1.093 percent by seven primary dealers.

The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.76, versus an average of 2.66 at the past 10 auctions.

Indirect bidders, a category of investors that includes foreign central banks, bought 59.7, compared with the average of 46.3 percent at the past 10 auctions. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 8.2 percent, versus a 15 percent average at the past 10 offerings.

“Investors wanted them, but they wanted them a little bit cheaper than they were trading at the time,” said Michael Pond, head of global inflation-linked research at Barclays Plc, a primary dealer. “‘We’re not looking for a sharp pick-up in inflation, but we expect a continued modest move higher.”

Inflation-indexed notes pay interest at lower rates than nominal Treasuries on a principal amount that’s linked to the Labor Department’s consumer price index.

Break-Even Rates

The gap between yields on 30-year bonds and same-maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt known as the break-even rate, increased to as high as 2.35 percentage points after the auction, from 2.31 percent the prior day. The average rate for the past decade is 2.45 percentage points.

The consumer price index rose 2.1 percent in the 12 months through May, the most since the year ended October 2012, and the economy has averaged a monthly gain in non-farm payrolls of 214,000 for the first five months of 2014.

The Fed’s preferred inflation gauge, the personal consumption expenditure price index, has remained below the central bank’s 2 percent goal for almost two years. The measure increased 1.6 percent in April.

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